NEW YORK — Home Depot Inc. and Wal-Mart Stores Inc. are turning up the heat in the appliance business as they team with manufacturers to cut prices and lure customers from industry leaders.
By year-end, all 1,064 Home Depot stores in the U.S. will sell ovens, washers and other appliances, while Wal-Mart in the next two years may have appliances in about half of its 3,050 discount and Sam's Club stores, analysts said.
This move into appliances is being felt by competitors like Sears, Roebuck & Co., which is lowering prices and spending more to advertise. Home Depot and Wal-Mart may force other retailers to follow Circuit City Group and exit the $17 billion U.S. appliance business, analysts said.
"Home Depot and Wal-Mart are magnets," said appliance analyst Efraim Levy of Standard & Poor's Equity Group. "They are brands that people trust, and (customers) feel they can get a low price."
Both retailers have exclusive marketing agreements with General Electric Co. and Maytag Corp. This lets them sell their appliances for 3 percent to 4 percent less than Sears, Lowe's Cos. and Best Buy Co., analysts said.
In as little as three years, home-improvement retailers like Home Depot and Lowe's may control as much as 25 percent of the appliance market. Wal-Mart alone may command as much as 10 percent, said analyst Nicholas Heymann of Prudential Securities.
"They're definitely going to get market share," Sears Chief Executive Alan Lacy said in an interview.
Sears now is the biggest U.S. seller of appliances, with about 38 percent of the market. Lowe's is second with about 6 percent to 7 percent and Best Buy is third with about 4 percent to 5 percent, analysts said. Circuit City, which decided to stop selling appliances four months ago, held about a 9 percent share.
Home Depot and Wal-Mart already have proven that they can dominate any product category they enter, said Angela Auchey, a portfolio manager at Federated Investment Management Co., which owns shares of both companies.
Wal-Mart, for example, surpassed Toys "R" Us Inc., the largest U.S. toy chain, as the top seller of toys in the U.S. in 1998 by offering lower prices. In the grocery business, the company is opening more supercenters, warehouse-size stores that have full grocery departments, and is taking business from chains such as Albertson's Inc., analysts said.
Unlike their rivals, Home Depot and Wal-Mart carry a limited inventory of appliances, just enough for consumers who want to take their purchases home the same day. This so-called virtual inventory arrangement keeps storage and distribution costs low, allowing the two retailers to discount appliances.
"We don't have to have high (profit) margins," said Don Galloway, Home Depot's national appliance merchant. This lets the No. 1 home-improvement retailer charge about 3 percent less, he said.
Wal-Mart, the world's biggest retailer, is expected to offer discounts of 3 percent to 4 percent, said retail analyst John Lawrence of Morgan Keegan & Co. The company recently expanded a test of appliances to 100 stores from 12 stores.
Wal-Mart sells General Electric appliances in its namesake stores and Maytag products at Sam's Club centers.
Kiosks located in Home Depot and Wal-Mart stores let customers select and order appliances directly from General Electric or Maytag warehouses through General Electric's distribution network.
"We never touch it," Galloway said.
General Electric and Maytag, the No. 2 and 3 appliance makers, are the only manufacturers that offer Web-based sales and one-day delivery from their regional warehouses, analysts said.
Bentonville, Arkansas-based Wal-Mart will only devote about 900 to 1,500 square feet of space at the front of its stores to appliances, said Lawrence, who rates Wal-Mart's shares "long-term buy."
Home Depot and Wal-Mart were given a chance to enter the appliance market in July when the No. 2 seller Circuit City said it would stop offering the products, leaving as much as $1.6 billion in annual sales up for grabs.
The following month, Heilig-Meyers Co., the biggest U.S. furniture chain, filed for bankruptcy and said it would close 300 stores, cutting its sales of appliances.
Home Depot and Wal-Mart are expected to win former Circuit City and Heilig-Meyers customers because they already attract a large number of shoppers with low prices on other goods, analysts said.
Some customers may visit a Wal-Mart supercenter two or three times a week, said Morgan Keegan's Lawrence. Wal-Mart said its stores attract 100 million shoppers a week.
Competition has increased as retailers wrestle to win customers abandoned by Circuit City and Heilig-Meyers.
In September, Home Depot ran national television and print ads offering General Electric and Maytag products at reduced prices, including Maytag's Neptune washer for $898. The Neptune cost about $1,000 when it was introduced in 1997. The average price of a washer is around $400.
Sears has run national advertisements to promote interest-free financing. Manufacturers are cutting prices as well and are offering rebates in conjunction with retailers.
Best Buy, the No. 3 U.S. appliance seller, also had promotions offering interest-free loans on some appliances and cut prices on others. The retailer has denied analyst and investor speculation that it may exit the appliance business by the end of the year.
"Best Buy will decide sooner rather than later that they should get out, (especially) once Home Depot and Wal-Mart are geared up," said portfolio manager Tim Ghriskey of Dreyfus Corp., which owns Home Depot and Wal-Mart shares.
If it does, that may mean there's more easy-pickings for Wal-Mart and Home Depot.